Relative Volatility Index: Reading the Direction of Volatility

Most momentum tools ask one question: how far did the price move? The relative volatility index asks a different one. It looks at how much the price is swinging around and then checks which way the close went on the days those swings happened. If the big, jumpy sessions keep ending higher, the reading climbs. If they keep ending lower, it sinks. Price direction tells you where the stock went. The RVI tells you which side the turbulence is on.

That sounds like a small twist, and in a sense it is. But it was built for a very specific job, and once you see that job, you’ll use it differently from the way most people use the RSI.

Where the relative volatility index came from

Donald Dorsey introduced the RVI in “The Relative Volatility Index” in the June 1993 issue of Technical Analysis of Stocks & Commodities. His starting complaint is one every chart reader has run into. We pile on indicators to confirm each other, MACD to confirm stochastics, momentum to confirm a moving average, and then wonder why the extra confirmation doesn’t improve results. Dorsey’s point was that most of these tools are built from the same raw material, daily price change, so the “confirmation” is often the first signal wearing a different shirt.

His analogy is a good one. Taking two wind-direction readings doesn’t tell you much more than one. Reading wind direction and barometric pressure does, because they measure different things. So he paired a timing signal, a dual moving average crossover, with a confirming measure built from something other than net price change. That measure was the RVI, which he described as the RSI with the 10-day standard deviation used in place of the daily price change, scaled from zero to 100.

A second indicator only helps if it measures something the first one can’t see. The RVI was designed around that idea, not as one more overbought-oversold line.

How the RVI is calculated

If you know how the RSI works, you already know most of this. The TA-Lib reference for the RVI lays out the original 1993 version step by step:

1. Standard deviation. Work out S, the standard deviation of the last 10 closes. Ten is the default lookback.
2. Sort it by direction. If today’s close is above yesterday’s, today’s S goes into the “up” bucket and the “down” bucket gets zero. If the close is lower, it’s the other way round. If the close is unchanged, neither bucket gets anything.
3. Smooth both buckets. Apply Wilder’s smoothing over 14 periods (the default) to the up series and the down series separately.
4. Scale it. RVI = 100 × smoothed up ÷ (smoothed up + smoothed down). When both are zero, TA-Lib sets the value to 50.

Wilder’s smoothing, also called RMA, is the same averaging the RSI uses. Each new value is (previous value × 13 + today’s input) ÷ 14 when the period is 14. The Chart program’s manual makes the same link, noting that its EMA period follows Wilder’s reckoning, the same as an RSI.

One detail trips people up when they compare platforms. Some write the formula with the smoothed total of all standard deviations in the denominator rather than up plus down. TA-Lib points out that this treats unchanged closes as down days, which makes it a slightly different indicator. On liquid stocks that rarely close flat, the gap is small. On illiquid counters it can matter, so check what your charting software does before you compare its readings with anyone else’s.

RVI versus RSI: the actual difference

Both indicators sort days into up and down by the direction of the close. The difference is what gets added to each pile. The RSI adds the size of the price change. The RVI adds the standard deviation of recent closes, a measure of how spread out prices have been.

Think about what that means in practice. Picture two up days with exactly the same closing gain. The RSI scores them the same. The RVI scores the one that arrived during a choppy, wide-ranging stretch higher, because the 10-day standard deviation was bigger then. So the RVI is less interested in “how much did it go up” and more interested in “when the stock was getting jumpy, which way did it tend to close?”

That’s why the two lines can disagree. A stock can grind higher in small steps while its rare sharp sessions close lower. The RSI will look healthy. The RVI may hover below 50. That disagreement is the whole point, since it was meant to be the barometer, not a second weather vane.

A quick naming warning before we go further. Several platforms also use “RVI” for the Relative Vigor Index, which TA-Lib flags as unrelated. If your screen shows two lines comparing close and open, you’re looking at the relative vigor index, not this one.

Reading the relative volatility index

The scale runs from 0 to 100, and the midpoint carries most of the meaning. According to TA-Lib’s summary, high values mean recent volatility arrived mostly on up bars, and low values mean it arrived mostly on down bars.

Dorsey’s own use was as a filter rather than a standalone signal. The rule as TA-Lib summarises it is simple: take a long entry only while the RVI is above 50, and a short only while it is below 50. In his 1993 setup, the entry itself came from a dual moving average crossover. The RVI just decided whether that crossover deserved to be acted on.

Here’s how we’d frame it for a swing trader looking at an NSE stock:

• Crossover up, RVI above 50. The timing signal and the volatility direction agree. This is the trade the system was built to take.
• Crossover up, RVI below 50. Price has turned up on the averages, but the noisy sessions are still mostly closing lower. Under Dorsey’s rule, you sit this one out.
• Crossover down, RVI below 50. Both point the same way for a short or an exit.
• Crossover down, RVI above 50. Mixed message, so no new short.

Notice what’s missing: fixed overbought and oversold levels. The sources we checked describe the RVI around its 50 line and as a confirming filter, not as a 70/30 tool. You’ll see people bolt RSI-style thresholds onto it anyway. That may or may not suit your style, but it isn’t how the indicator was introduced.

The RVI’s most useful number is 50. Above it, the turbulence has been landing on up closes. Below it, on down closes. Everything else is detail.

A worked example with made-up prices

Let’s run the numbers on a hypothetical stock so the mechanics are concrete. None of these prices belong to a real company.

Suppose the last 10 closes are ₹500, 504, 501, 507, 512, 509, 515, 520, 517 and 524. Their average is ₹510.90 and the population standard deviation is about ₹7.70. (Some platforms use the sample version, which gives a slightly bigger number. We’re using the population version throughout.)

Say the smoothed up value coming into today is 4.20 and the smoothed down value is 2.80. The RVI stands at 100 × 4.20 ÷ 7.00 = 60.00.

Day 11: the stock closes at ₹531, up from ₹524. The new 10-day window runs from 504 to 531, and its standard deviation works out to about 8.84. Because the close rose, 8.84 goes into the up bucket and zero into the down bucket.

• Smoothed up = (4.20 × 13 + 8.84) ÷ 14 = 63.44 ÷ 14 ≈ 4.531
• Smoothed down = (2.80 × 13 + 0) ÷ 14 = 36.40 ÷ 14 = 2.600
• RVI = 100 × 4.531 ÷ (4.531 + 2.600) ≈ 63.54

Day 12: the stock closes at ₹522, down from ₹531. The window now runs from 501 to 522, with a standard deviation of about 8.45. The close fell, so 8.45 goes into the down bucket.

• Smoothed up = 4.531 × 13 ÷ 14 ≈ 4.208
• Smoothed down = (2.600 × 13 + 8.45) ÷ 14 = 42.25 ÷ 14 ≈ 3.018
• RVI = 100 × 4.208 ÷ (4.208 + 3.018) ≈ 58.23

Two things stand out. First, one down day knocked more than five points off the reading, because the volatility attached to it was large. Second, the RVI is still above 50. If our moving averages had just crossed upward on day 11, Dorsey’s filter would still allow a long on day 12. A run of high-volatility down closes would be needed to drag it under 50 and switch the filter off.

Now try a thought experiment. Keep day 12’s close at ₹522 but imagine the previous 10 sessions had been far calmer, with a standard deviation nearer 3. The down bucket would get a much smaller input and the RVI would barely dip. Same price move, different reading. That’s the RVI doing exactly what it was designed to do.

The 1995 revision and the inertia indicator

Dorsey came back to the idea in September 1995 with a follow-up that covered the old RVI, a new RVI and something he called inertia. According to the Chart manual, the revised RVI runs the original calculation on daily highs and on daily lows separately and then averages the two. TA-Lib lists this revision as a separate function, RVIR, and keeps the plain RVI as the 1993 closing-price version.

Inertia, per the same manual, is the RVI smoothed with a 20-day least squares moving average. The manual also notes that the smoothed line tends to track the raw RVI closely, which makes the two hard to tell apart on a chart. So when a platform offers “RVI”, it’s worth checking which version you have. The 1995 high-low version can read differently from the original on the same stock.

Putting it to work on Indian charts

A few practical points if you want to try it on Nifty stocks or the index itself.

Use it with a timing tool. On its own, “RVI above 50” just says the jumpy days have leaned up. It doesn’t tell you when to enter. Dorsey paired it with a moving average crossover, and that’s a sensible place to start. A breakout or a support bounce can play the same role.

Don’t double count. Adding the RVI to a chart that already has the RSI and the stochastic RSI doesn’t give you three opinions. The RSI and stochastic RSI share the same base. The RVI at least brings a different input, which is the reason to use it at all.

Watch the settings. The defaults are a 10-period standard deviation and 14-period smoothing. Shorten them and the line gets twitchy. Lengthen them and it lags. Whatever you pick, test it on past data for the stocks you actually trade before trusting it with money.

Mind thin stocks. On small, illiquid counters, flat closes and price gaps are more common. That’s where the denominator difference between platforms and the choice of sample or population standard deviation can shift the numbers.

If you’re building a full toolkit, our guide to technical analysis for Indian stocks covers how trend, momentum and volume indicators fit together.

Where it falls short

• It still lags. Two layers of averaging, the 10-day standard deviation and the 14-period smoothing, mean the RVI reacts after the fact.
• Direction comes from the close alone. A stock that swings wildly intraday but closes a paisa higher counts as an up day.
• Versions differ. Original versus revised, sum-of-buckets versus total-volatility denominators, sample versus population standard deviation. Two traders quoting “the RVI” can be looking at different numbers.
• It’s a filter, not a forecast. A reading above 50 doesn’t mean the stock will rise. It only describes where recent volatility has been landing.

The short version

The relative volatility index takes the RSI’s structure and feeds it standard deviation instead of price change. That gives you a 0-to-100 line that shows whether a stock’s jumpy sessions have been closing up or down. Dorsey built it as a second opinion for a timing signal: go long only above 50, short only below. Used that way, alongside a tool that measures something different, it does what he intended. Used as just another overbought-oversold line, it mostly repeats what your RSI already told you.

Disclaimer: This article is for education only and is not investment advice. The stock and prices in the worked example are hypothetical. Consult a SEBI-registered adviser before making investment decisions.